Widening Affordability Gap Drives Higher Demand In Multifamily Apartments
Multifamily rent prices have risen 12.6% year over year in 2022 yet monthly mortgages on median priced houses still remain significantly more expensive. The affordability gap, a measure of the difference between the U.S. average mortgage payment and average rental price widened to more than $400/month. This will continue to drive multifamily and apartment demand up as the affordable housing of choice.
Interest Rates. With inflation running hot at over 9 percent on the last CPI reading, the federal reserve is bent on stopping inflation. In order to do so, they are utilizing one of the tools they have to decrease monetary supply in the market and have been aggressively increasing interest rates. This has caused mortgage rates to surge to 6% following the Federal Reserve raising benchmark interest rates by 0.75 percentage point in July. Mortgages are now predicted to rise from 5% to 6.5% in 2023, reaching the highest point in four decades.
Rising interest rates and limited supply of homes has made the prospect of home ownership more difficult for many people. The National Association of Realtors (2022) reported that the Housing Affordability Value Index (HAVI) - a measure of the ability of a family to maintain monthly mortgage payments - fell by 21% from February 2021 to February 2022. Because of this, one in five millennials are now choosing to be “forever renters”.
Investment Opportunities. For anyone that is interested in capital preservation during inflation, multifamily is a strong asset because there will always be demand for affordable housing. It will be difficult to maintain growth in other investments (like stocks and bonds) at the same rate as inflation (8-9%).
How can an investor preserve purchasing power through multifamily investing?
“Rent where you live and own what you can rent to others.” said Grant Cardone, a real estate mogul and international business speaker with a $5 Billion portfolio of multifamily properties.
As the cost of goods increases, the expense can be pushed to the renter by increasing rent and these adjustments can be made each month as leases expire. This helps to increase the NOI, and value of the property to stay ahead of inflation.
Multifamily Rental property investments can be particularly attractive to those looking for multiple sources of passive income, financial security, and financial freedom. Its low volatility and ability to continuously generate monthly cash flow makes it a great inflation hedge, and investment vehicle for you to achieve financial independence.
Investing in a multifamily project has many advantages as, on balance, real estate offers lower economic and inflationary risks than stocks. Of course, the decision to invest in real estate or invest in stocks or bonds or other asset classes, which offer different risks and opportunities, is a choice which depends on an investor's risk tolerance, objectives, financial status and investment style. If you’d like to know more about multifamily investing please feel free to contact us for a no obligation chat or subscribe to our upcoming newsletters. Yours sincerely, Anna and Peter Tan SuiteLifeMF has acquired, operated and invested in real estate for over 10+ years, investing in over 1500 doors and with over US$ 100 under management (900+ doors). The company also operates a property management company which handles a portfolio of single family homes. SuiteLifeMF maintains a disciplined approach to investing, which focuses on capital preservation and strong returns with a deep understanding of submarkets, economic and political situations.
Friedman, N. (2022, July 12). Housing-affordability index drops to lowest level since 2006. The Wall Street Journal. Retrieved August 5, 2022, from https://www.wsj.com/articles/housing-affordability-index-drops-to-lowest-level-since-2006-11657288800
Team, N. M. (2022, March 15). U.S. single-family rent price growth again hits record high in January, CoreLogic reports. CoreLogic®. Retrieved August 5, 2022, from https://www.corelogic.com/press-releases/u-s-single-family-rent-price-growth-again-hits-record-high-in-january-corelogic-reports/
Nielsen, B. (2022, July 13). How interest rates affect the housing market. Investopedia. Retrieved August 5, 2022, from https://www.investopedia.com/mortgage/mortgage-rates/housing-market/
Nwogugu, Michael. (2005). On the Choice Between Renting and Home-Ownership in the Housing Industry. SSRN Electronic Journal. 10.2139/ssrn.859927.
Caginalp, R. (n.d.). Fed raises rates: How the Fed's rate decisions move mortgage rates. Bankrate. Retrieved August 5, 2022, from https://www.bankrate.com/mortgages/federal-reserve-and-mortgage-rates/